What Macroeconomists Do
Describe the activities and objectives of macroeconomists.
How do macroeconomists use their skills, and what do they do with all the data they gather and the theories they develop? Besides teaching economics, macroeconomists engage in a wide variety of activities, including forecasting, macroeconomic analysis, basic research, and data development for government, nonprofit organizations, and private businesses.
Macroeconomic Forecasting
Many people believe that economists spend most of their time trying to forecast the performance of the economy. In fact, except for a relatively small number of forecasting specialists, forecasting is a minor part of what macroeconomists do. One reason macroeconomists don't emphasize forecasting is that on the whole they are not terribly good at it! Forecasting is difficult not only because our understanding of how the economy works is imperfect, but also because it is impossible to take into account all the factors—many of them not strictly economic—that might affect future economic trends. Here are some questions that a forecaster, in trying to project the course of the economy, might have to try to answer: How will events abroad affect congressional authorizations for military spending over the next few years? Will there be a severe drought in agricultural regions, with effects on global markets for commodities? Will productivity rise as rapidly in the future as it did in the late 1990s and early 2000s as businesses increasingly adopted computer technology? Because answers to such questions are highly uncertain, macroeconomic forecasters rarely offer a single prediction. Instead, they usually combine a "most likely" forecast with "optimistic" and "pessimistic" alternative scenarios.
Does the fact that macroeconomics can't be used to make highly accurate forecasts of economic activity mean that it is a pointless field of study? Some people may think so, but that's really an unreasonable standard.
Meteorology is an example of a field in which forecasting is difficult (will it definitely be sunny this weekend?) but in which there is also a lot of useful knowledge (meteorologists helped discover the depletion of the earth's ozone layer and pointed out its dangers). Similarly, cardiologists usually can't predict if or when a patient will have a heart attack—they can only talk about probabilities. Like meteorologists and doctors, economists deal with a system whose complexity makes gaining a thorough understanding difficult and forecasting the system's behavior even more difficult. Rather than predicting what will happen, most macroeconomists are engaged in analyzing and interpreting events as they happen (macroeconomic analysis) or in trying to understand the structure of the economy in general (macroeconomic research).Macroeconomic Analysis
Macroeconomic analysts monitor the economy and think about the implications of current economic events. Many analysts are employed in the private sector, such as in banks or large corporations. Private-sector analysts try to determine how general economic trends will affect their employers' financial investments, their opportunities for expansion, the demand for their products, and so on. Some private firms specialize in macroeconomic analysis and assist clients on a fee-for- service basis.
The public sector, which includes national and regional governments and international agencies such as the World Bank and the International Monetary Fund, also employs many macroeconomic analysts. The main function of publicsector analysts is to assist in policymaking—for example, by writing reports that assess various macroeconomic problems and by identifying and evaluating possible policy options. Among U.S. policymakers, the officials who set monetary policy may call on the aid of several hundred Ph.D. economists employed within the Federal Reserve System, and the President has the advice of the Council of Economic Advisers and the professional staffs of numerous departments and agencies.
For members of Congress, a frequent source of macroeconomic analysis is the Congressional Budget Office. Economic policymakers also often go outside the government to seek the advice of macroeconomists from business or academia.Macroeconomic Research
Macroeconomic research takes an amazing variety of forms, from abstract mathematical analysis to psychological experimentation to simulation projects in which computers are used to generate random numbers that represent the randomness of day-to-day economic activity. Nevertheless, the goal of all macroeconomic research is to make general statements about how the economy works. The general insights about the economy gained from successful research form the basis for the analyses of specific economic problems, policies, or situations.
To see why research is important, imagine that you are an economist with the International Monetary Fund whose task is to help Zimbabwe control its high rate of inflation. On what basis can you offer advice? Basically, you should know what inflation-fighting policies other countries have used in the past, what the results have been, how the results have depended on the characteristics of the country employing the policy, and so on. Particularly if the situation you are analyzing is not identical to any of the previous cases, having some theoretical principles would also help you identify and understand the main factors contributing to that country's inflation. Analyzing the historical cases and working out the theoretical principles by yourself from scratch might involve many years' effort. The value of ongoing research activities is that many of the results and ideas that you need will already be available in books or professional journals or circulated in unpublished form. Because it forms the basis for activities such as economic analysis and forecasting, macroeconomic research is the engine that pulls the whole enterprise of macroeconomics behind it.
Macroeconomic research takes place primarily in colleges and universities, in nonprofit institutions (such as the National Bureau of Economic Research, the Brookings Institution, and the American Enterprise Institute), and in the public sector (the government and international agencies).
Particularly in the public sector, the line between economic analysis and macroeconomic research is much fuzzier than we have drawn it here. The reason is that many economists move back and forth between analysis of specific problems (such as Zimbabwe's inflation problem) and more basic macroeconomic research (such as an analysis of inflation in general).Economic Theory. How is macroeconomic research carried out? As in many other fields, macroeconomic research proceeds primarily through the formulation and testing of theories. An economic theory is a set of ideas about the economy that has been organized in a logical framework. Most economic theories are developed in terms of an economic model, which is a simplified description of some aspect of the economy, usually expressed in mathematical form. Economists evaluate an economic model or theory by applying four criteria:
1. Are its assumptions reasonable and realistic?
2. Is it understandable and manageable enough to be used in studying real problems?
3. Does it have implications that can be tested by empirical analysis? That is, can its implications be evaluated by comparing them with data obtained in the real world?
4. When the implications and the data are compared, are the implications of the theory consistent with the data?
For a theory or model—of any type, not just economic—to be useful, the answer to each of these questions must be "yes." Unfortunately, though, economists may not always agree in their evaluation of a particular model, with the result that controversies sometimes persist about the best way to model a given economic situation.
We present a summary of the main steps in developing and testing an economic theory or model in "In Touch with Data and Research: Developing and Testing an Economic Theory."
Data Development
The collection of economic data is a vital part of macroeconomics, and many economists are involved in the data development process.
In the United States as well as all other major countries, data on thousands of economic variables are collected and analyzed. We have already presented some important macroeconomic dataIn Touch with Data and Research
Developing and Testing an Economic Theory
To illustrate the process of developing and testing an economic theory, suppose that we want to develop a theory that explains the routes that people take when they commute from home to work and back. Such a theory would be useful, for example, to a traffic planner who is concerned about how a proposed housing development will affect traffic patterns. Here are the steps we would take.
Step 1. State the research question.
Example: What determines traffic flows in the city during rush hours?
Step 2. Make provisional assumptions that describe the economic setting and the behavior of the economic actors. These assumptions should be simple yet capture the most important aspects of the problem.
Example: The setting is described by the map of the city. The assumption about behavior is that commuters choose routes that minimize driving time.
Step 3. Work out the implications of the theory.
Example: Use the map of the city to plot a route that minimizes driving time between home and place of work.
Step 4. Conduct an empirical analysis to compare the implications of the theory with the data.
Example: Conduct a survey of commuters to identify (1) home locations, (2) work locations, and (3) routes taken to work. Then determine whether the routes predicted by the model are generally the same as those reported in the commuter survey.
Step 5. Evaluate the results of your comparisons.
If the theory fits the data well: Use the theory to predict what would happen if the economic setting or economic policies change.
Example: Use the minimum-driving-time assumption to evaluate the traffic effects of a new housing development by figuring out which routes the residents of the development are likely to take.
If the theory fits the data poorly: Start from scratch with a new model. Repeat Steps 2-5. Example: Change the provisional behavioral assumption to the following: Commuters choose the route that minimizes the distance they must drive (not the time they spend driving).
If the theory fits the data moderately well: Either make do with a partially successful theory or modify the model with additional assumptions and then repeat Steps 3-5. Example: A possible modification of the minimum-driving-time assumption is that commuters will choose more scenic over less scenic routes, if driving time is not increased by more than a certain number of minutes. To test the model with this modified assumption, you must determine which routes are more scenic (those that pass a lake) and which are less scenic (those that pass a dump).
series, such as measures of output and the price level, and we will look at these and others in more detail in Chapter 2. Macroeconomists use economic data to assess the current state of the economy, make forecasts, analyze policy alternatives, and test macroeconomic theories.
Most economic data are collected and published by the Federal government— for example, by agencies such as the Bureau of the Census, the Bureau of Labor Statistics, and the Bureau of Economic Analysis in the United States, and by central banks such as the Federal Reserve. To an increasing degree, however, these activities also take place in the private sector. For example, marketing firms and private economic forecasting companies are important collectors, users, and sellers of economic data. In this book, many of the boxes called "In Touch with Data and Research" describe major macroeconomic data series and tell you how they are collected and where to find them; other "In Touch with Data and Research" boxes describe topics and issues in macroeconomic research.
Much of the data collection and preparation process is routine. However, because providers of data want their numbers to be as useful as possible while keeping costs down, the organization of major data collection projects is typically the joint effort of many skilled professionals. Providers of data must decide what types of data should be collected on the basis of who is expected to use the data and how. They must take care that measures of economic activity correspond to abstract concepts (such as "capital" and "labor") that are suggested by economic theory. In addition, data providers must guarantee the confidentiality of data that may reveal information about individual firms and people in the economy. In a large data-gathering organization such as the Bureau of the Census, each of these issues is exhaustively analyzed by economists and statisticians before data collection begins.[6] [7] 1.3